Real Estate Weekly: REITs Climb As Storage And Hotel REITs Surge

Weekly Review

The REIT ETF indexes (VNQ and IYR finished the week higher by 1.4%, on strength in the student housing, storage, and hotel sectors. The S&P 500 (NYSEARCA:SPY) declined 0.2%. The homebuilder ETFs (XHB and ITB) were higher by 1.2% on the week. The commercial construction ETF (NYSEARCA:PKB) declined 1.9%.

(Hoya Capital Real Estate, Performance as of 12pm Friday)

Across other areas of the real estate sector, mortgage REITs (NYSEARCA:REM) finished the week higher by 0.3% and the international real estate ETF (NASDAQ:VNQI) gained 0.4%. The 10-Year Treasury yield (NYSEARCA:IEF) fell 8 basis points on the week. Interest rates are back near six month lows amid uncertainty over the pro-growth legislative agenda of the Trump administration. The 10-year yield is down 20bps since the start of the year.

REITs are now lower by 0.1% YTD on a price-basis and higher by rough 2% on a total-return basis. The sector divergences are also quite significant: the Data Center sector has surged 17% while the retail-focused REITs have fallen double-digits. REITs ended 2016 with a total return of roughly 9%, lower than its 20-year average annual return of 12%.

REIT Earnings

Last week, we published our quarterly “REIT Earnings Report Card” where we discussed that Q1 earnings were generally better-than-expected across the real estate sector. Roughly 45% of REITs exceeded consensus expectations, while 40% met, and just 15% missed. 35% of REITs boosted 2017 guidance while just 10% lowered guidance. Below is the sector performance since the beginning of earnings season.

Economic Data

Every week, we like to dive deeper into the economic data that directly impacts real estate.

(Hoya Capital Real Estate, HousingWire)

Housing Starts & Permits

April housing starts and permitting data released this week was weaker-than-expected across the board as total housing starts and permits fell by 2.6% and 2.5%, respectively. Multifamily starts, a volatile data series, were 15% lower than April 2016, an indication that we may finally be seeing the long-awaited pullback in MF construction. Based on starts data (assuming roughly 18 months of construction time), completions should peak during this summer and gradually tail off through 2018 based on the housing starts data.

Labor Markets Continue Lead Economy

Initial and continuing jobless claims this week were better than expected. By many measures, the US labor market is the healthiest it has been at least four decades as both initial claims and continuing claims are at 45 year lows.

Last week, we pointed out that, amid the supposed ‘chaos’ you see on mainstream media, that the financial markets have seemingly never been less worried. Since we are continually bombarded with bad “news” by the press, it is understandable that many investors have an irrationally dismal view of the world.

Labor markets in the US are the strongest they have been in a generation, inflation is almost non-existent, real wages are growing faster…

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